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23 Comments
- Hillsfar, on 06/01/2009, -3/+25This is what they mean by Survivorship Bias - the tendency for failed companies to be excluded from performance studies because they no longer exist.
They took out Citigroup, whose stock went down to about $1 recently, and GM, whose stock went down to sub-$1, is now out (as well as AIG a while back). And they put in functional companies like Cisco and Travelers (and Kraft Foods to replace AIG).
So now the Dow can "rise" again and when financial advisors want you to invest your money in an index fund or into a mutual fund, they'll say, "Look at how the market rose over the last 50 years..."
Remember, folks: 6 in 10 stocks fail after 5 to 10 years. It's only certain strong growth companies earning multiples of their value every few years that pull up the S&P500 average and the Dow Jones Industrial Average. - thinkb4utype, on 06/02/2009, -1/+18And that's how one gets the DOW to go up 200 points.
- SirOutrageous, on 06/01/2009, -4/+21That is unbelievable. Who would have thought this day would come?
- redsfaithful, on 06/01/2009, -1/+18End of an era.
- redxii, on 06/02/2009, -0/+7The DOW went up 220 points, INSTANT ECONOMIC RECOVERY!
- novenator, on 06/02/2009, -1/+8Ouch.
- orca94, on 06/02/2009, -0/+6They were, but not anymore.
- Rekutyn, on 06/02/2009, -1/+6Isn't Travelers Insurance owned by Citigroup?
- inactive, on 06/02/2009, -2/+7me
as well as anyone who has watched the news in the past year - orca94, on 06/02/2009, -0/+5While you're somewhat right if the switches are done excessively and specifically targeted at companies that are expected to flourish, you're also somewhat wrong.
Arguing that failed companies shouldn't be replaced with "functioning" ones because that doesn't give an appropriate view of actual market conditions is illogical. Think of it this way, if the Dow had started off with 20 random companies about 50 years ago, a good percentage of those companies are likely to fail at some point as you suggested yourself. If say 60% (as you claim) failed, even if the rest grow at a rate above that of GDP growth, the likelihood is that the index as a whole will probably not have risen commensurately to the rest of the economy as a whole. I.e. the total market capitilization of the index will give a far grimer view of economic growth than what would have been experienced.
The simple way to think about is that a stock index is a sampling of the stock market. Just because some companies cease to exist, doesn't mean new companies aren't coming into fruition all the time. The point is, the index should represent an accurate sampling of the population (obviously GM and Citigroup are not an accurate sampling of the entire population), and to do that every once in a while stocks need to be swapped.
But again, whether it has been done correctly this time or not is up to debate. Whether stocks should be switched out of the index to accurately reflect the economy from time to time is not. - nepidae, on 06/02/2009, -0/+5I would say that picking non-failing stocks is the correct move. If this was done in secret then I would agree with you.
- nepidae, on 06/02/2009, -2/+6the end was about 30 years ago.
- yeahright, on 06/02/2009, -0/+3Why the hate?
- inactive, on 06/02/2009, -0/+1*error ;)
- Hillsfar, on 06/02/2009, -0/+1It's more like, if you invested in 500 companies to represent the market - assuming you had the money to do it, or as a mutual fund manager you did it... then over 5 to 10 years, many of those companies would fail and you would lose money along with it. Even while the S&P500 continues to rise as a general trend over time - because it's constantly replacing failing companies with new ones.
This adds to the reason that most mutual fund managers can't beat the market. And financial planners are committing fraud when they show charts of the S&P500 to prospective clients. - inactive, on 06/02/2009, -0/+1as it's purchasing power continues to drop to 0
- inactive, on 06/02/2009, -3/+3why? because they make great equipment?
- Kaiosama, on 06/02/2009, -1/+1Actually GM was raking in record profits 20 years ago.
The era ended though when the hubris got to them. - inactive, on 06/02/2009, -1/+1Confederated Slave Holdings, how's that doing?
- inactive, on 06/02/2009, -2/+1anyone without zombie braiiiiiiiinnnnssss
- Paranor01, on 06/02/2009, -3/+2actually it started about 60 years ago, when we finally knew we had the means to make ourselves extinct.
@Kaiosama: you didn't quite get the meaning. - VassilaZaitsev, on 06/02/2009, -3/+1so its all smoke and mirrors
- TheGuruStud, on 06/02/2009, -10/+6You know, I'd rather have GM than cisco. Goddamn I hate cisco.
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